Quick Summary

A car loan can build credit if managed responsibly. Making on-time payments and diversifying your credit mix can positively impact your credit score over time. CCCU breaks down how a car loan can influence your credit score and what you need to know. Buying a car is often a major financial milestone. But beyond getting you from point A to point B, a car loan can serve as a valuable tool to improve your credit score. If you’ve ever wondered, “Does a car loan build credit?”—the answer is yes, but it requires responsible management.

How Car Loans Affect Your Credit Score

A car loan can influence your credit score in several ways. Your score is calculated based on five key factors:

1. Payment History (35%) – Making your car loan payment on time is crucial. It’s the largest component of your credit score. Even a single missed payment can hurt your credit.
2. Credit Utilization (30%) – While auto loans don’t directly affect utilization like credit cards, lowering your overall debt-to-income ratio can reflect positively on your credit.
3. Credit History (15%) – The length of time you’ve had credit accounts matters. A car loan can help establish a longer credit history if kept in good standing.
4. Credit Mix (10%) – Lenders prefer borrowers with diverse credit types. Adding an installment loan, like a car loan, alongside revolving credit (e.g., credit cards) can enhance your credit mix.
5. New Credit (10%)- Applying for a car loan triggers a hard inquiry, which can slightly lower your score temporarily. However, shopping for rates within a 30-day window counts as one inquiry.

Tips for Using a Car Loan to Build Credit

• Pay on Time: Set reminders or automate payments to ensure timely installments.
• Avoid Late Payments: Even one missed payment can have long-term consequences.
• Diversify Your Credit: Balancing installment loans and credit cards improves your profile.
• Know Your Credit Score: Before financing, check your score to avoid predatory rates.
• Shop Smart: Rate shopping within a short period minimizes the impact on your credit.

If you’re looking to get an auto loan, be sure to read our blog How to Get An Auto Loan From a Credit Union to help you navigate through the process of obtaining an auto loan.

Conclusion

A well-managed car loan can steer you toward a healthier credit score. When you’re ready to buy, consider CCCU’s trusted car dealership Members Auto for a smooth financing experience. For more information about CCCU’s auto loans and first-time auto buyer program, visit our Auto Loans page or call us at 702-228-2228, Option 1.